The EPA May Be About to Step on the Gas

In late 2011 The Wall Street Journal noted, regarding the potential for an overzealous Environmental Protection Agency to bring about a moratorium on U.S. fracking, "The agency is dominated by the anticarbon true believers, and the Obama Administration has waged a campaign to raise the price and limit the production of fossil fuels."

Questionable findings
If you recall that phraseology, you probably also remember that the Journal's scathing assessment of the agency resulted from an EPA "draft" report indicating that hydraulic fracturing may have contaminated the drinking water in Pavillion, Wyoming, a metropolis whose 175 citizens constitute a grouping a quarter the size of my high school class. While "fracking" in the area may indeed have been the result of the drilling of about 100 wells by EnCana (NYSE: ECA  ) , there are a couple of elements in the draft that give one pause:

  • The EPA maintains that it found 2-butoxyethyl phosphate in the town's drinking water. Fortunately -- or unfortunately -- 2-BE is a fire retardant not typically associated with oil and gas, but it is common in plastics used in drinking wells.
  • While the fracking near Pavillion generally occurs at depths between 1,000 feet and 1,500 feet -- far above the 10,000-foot minimums in most venues -- it nevertheless is conducted well below water tables that are normally no more than 500 feet deep. As such, and as I've noted in past Foolish articles, one industry expert has pointed out that "it would defy physics" for fracking chemicals to make their way into groundwater.

Whatever its cause, however, the Wyoming controversy wasn't the only fracking-related incident to rear its ugly head in the past year. Last April, for instance, Chesapeake Energy (NYSE: CHK  ) -- the nation's second-largest producer of natural gas and the proverbial parent of many of the nation's unconventional drilling plays -- had a well get away in Bradford County, Pennsylvania, beneath which sits the Marcellus Shale. The errant well was brought under control with the help of a Halliburton (NYSE: HAL  ) unit, but not before it had spilled chemically treated water into a creek 150 miles northwest of Philadelphia.

The brewing federal-state battle
While the list of mishaps is likely to lengthen, given the nature of oil and gas production, the key question that has emerged for the world of fracking -- which has boosted U.S. gas reserves exponentially -- is who will end up holding the regulatory billy club over the industry. The contest is between the states and the joint efforts of the Interior Department and the EPA. For the sake of perspective, in 2005 Congress made it clear that its intent was not that the EPA should control hydraulic fracturing under the Safe Drinking Water Act. You won't be surprised to learn that the states prefer to maintain their individual controls.

Nevertheless, at the incessant prodding of a host of environmental groups, the EPA has taken the skirmish above ground, where its authority is less questionable. Next week -- Tuesday the 17th, to be precise -- the agency will issue a final set of regulations relating to air emissions emanating from oil and natural-gas drilling and completion operations. According to EPA predictions, the new regs will reduce volatile organic compound emissions from fracking operations by 25%, air toxics by a number approaching 30%, and methane by about 26%.

Apparently a major part of the anticipated regs will involve requiring the industry to perform "green completions," which, according to a spokesman for one environmental group, will prove cost-effective by permitting the companies to capture the methane that now is wafting into the atmosphere. Devon Energy (NYSE: DVN  ) has routinely used such techniques in Texas' Barnett Shale -- among other sites -- for nigh onto a decade. The process involves employing portable equipment to capture for resale much of the methane that would otherwise escape.

The Grand Old Party and the frackers
But the Feds are hardly free to impose their fracking edicts across the board. Indeed, they're receiving enemy fire from both Senate Republicans and industry types. Oklahoma's James Inhofe, the ranking Republican on the Senate Committee on Environment and Public Works, is leading the charge -- backed by seven of his compatriots -- by introducing legislation that would put the brakes on the administration's attempts to further meddle in fracking.

The bill mandates that only the states may exercise regulatory authority over hydraulic fracturing on federal lands within their boundaries. As Inhofe has said, "States better understand their unique geologies and interests."

The GOP Senators' bill isn't likely to go far, but it establishes the party's bona fides as supporters of the energy industry and the jobs it provides. Furthermore, the group is receiving active cover from industry types, including ExxonMobil (NYSE: XOM  ) CEO Rex Tillerson, who carried a banner for state-controlled regulation at his company's annual analyst conference last month. "Our regulatory process has become so complicated by so many duplicative agencies, by so many mandates from Congress, that now it has become a way to stop things from happening," he said.

Jack Dalrymple, the Republican governor of North Dakota, the primary locus of the prolific Bakken Shale, has chimed in with the observation that EPA restrictions on fracking "would have a huge economic impact on our state's energy development. We believe strongly that this should be regulated by the states."

The Foolish bottom line
It's clear that the 10th amendment to the U.S. Constitution -- which limits the powers of the federal government to those delegated to it by that same constitution -- has essentially been shunted aside by the current administration. Nevertheless, it's unlikely that the de facto coalition of the states and the industry will go down without a fight in the expanding fracking fracas.

As such, energy investors -- ideally all Fools -- would be well-advised to keep close tabs on this battle by clicking on the links below and adding the companies named above to their personalized watchlists.

Fool contributor David Lee Smith doesn't own shares of any of the companies named in this article. The Motley Fool owns shares of Devon Energy. Motley Fool newsletter services have recommended buying shares of Chesapeake Energy, Devon Energy, and ExxonMobil. The Motley Fool has a disclosure policy.

We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


Read/Post Comments (6) | Recommend This Article (5)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On April 11, 2012, at 3:40 PM, heatman101 wrote:

    I live within 20 mi. of the Bradford County Pa Well. The only issue there, was human error...had NOTHING to do with the fracking or the well "getting away" from them. A pipe coupling was not tightened rpoperly and the high pressures blew out a seal between the flanges... totally a human error problem and easily preventable...

    That being said....there is a vast difference between the SOP of Chesapeake CHK and that of Shell (RDS). Shell runs a very tight ship and Chesapeake a very hap hazard one...hopefully they have learned a bit... Shell is very big on safety and Chesapeake on production...

  • Report this Comment On April 11, 2012, at 3:55 PM, BillTheBuckeye wrote:

    While many good points are made and the viability of fracking needs to be based on facts, not rumor, I find it difficult to support state rights on federal land. The fed has the right to disallow use of their land altogether, so governing how it is used is also within their rights. Kind of goes hand and hand with the term Federal Land.

  • Report this Comment On April 11, 2012, at 4:28 PM, sheldonross wrote:

    @BillTheBuckeye

    The elephant in that room is the persistent question, what is "federal" land? So in this geographic area that is a state, there exists pockets of land that aren't part of the state?

    I suspect you'll disagree, but I find the concept of "federal land" within a state a contradiction in terms.

  • Report this Comment On April 11, 2012, at 4:54 PM, DJDynamicNC wrote:

    "It's clear that the 10th amendment to the U.S. Constitution -- which limits the powers of the federal government to those delegated to it by that same constitution -- has essentially been shunted aside by the current administration."

    That's not clear at all, actually.

    What's especially not clear is what value, if any, the 10th amendment has in general. No less an authority than the Supreme Court of the United States found that the 10th amendment "added nothing to the Constitution as originally ratified." (United States vs Sprague).

    If you want a federalist assortment of strong local governments and weak oversight from the federal government, that's fair, but try to remind yourself that the reason we have a Constitution is that the Articles of Confederation, which proposed just such a decentralized affair, were an utter failure.

    It's all well and good to wish for an effective federalist government, but as the European Union is finding out much to its dismay, it's not very workable in practice.

  • Report this Comment On April 11, 2012, at 9:24 PM, A2Matty wrote:

    DJ - the EU can't be compared to the US - Alan Greenspan spelled this out extremely well about 6 months ago (I'm sure you could find it on Youtube). different cultures have indeed collided - Greece measures their history in millenia not centuries, Germans work hard and retire late, Italians, not so much. They don't want to pay for the others' lifestyles and I wouldn't either.

    The 10th added no value because it was a reminder that the prior amendments were, in fact, a limit on the federal government. A lawyer would view that as redundant (but be happy to bill you for reading it anyway). You may call it the most worthless, I'd call it the most ignored. Either way, it doesn't change the fact that companies, energy and others alike, are swimming in red tape!!!!

    I work in franchising - no environmental impact - and we have insane legal bills just to operate in the quagmire of regulations that cover us in each of the 50 states and federally. The constitution didnt create that, politicians did.

    I agree that we've got to protect the environment, but at what cost? China is drilling 60 miles off of the Florida coast! If they have a spill will that not affect us? We gave PetroBrazil (sp?) $2billion+ to drill and Obama told them we'd be their best customers - what was that? It's okay to risk spills in Brazil? Why not be our own best customer. Opening up federal lands (which were usually ceded by states so the feds would pay to maintain parks) is a great way to have better oversight on drillers as opposed to privately owned sites (which is where our boom is coming from). Federal lands also refers to offshore drilling - and right now those permits are not being approved, especially if they're within 20 miles of the shore or so. Deeper is riskier, does that make sense? Don't get me started on ANWR - there's so much oil that it actually seeps out of the ocean floor and washes up on the coast!

    We've got a couple of hundred years worth of supply, lets use it! And hey, why not earmark some of the money to pay off our debt while we're at it!

  • Report this Comment On April 12, 2012, at 12:37 PM, asaulino wrote:

    I'm pretty new to the boards and commentary areas of the Fool's site. They seem to be both polite and at a pretty high level (on average) regarding usefulness of comments, and the knowledge of the folks commenting; so I'm learning a lot just by reading the back-and-forth - thanks, all! Obviously, everyone brings their own point of view to the table. So here is mine: Property rights are enshrined in the Constitution and critical to all of us who invest. The idea that the US Government is excluded from owning property, and/or exercising the rights of property ownership (including mineral rights) is not functional, or even rational. If the federal government doesn't really own the land it "owns", then who does? Some seem to think the states own it, or maybe "We the People" do (those using this expression always mean, "I, the People"). In the first case, the Constitution is partially voided and we are back with the Articles of Confederation (thanks, DJDynamicsNC); in the latter case -- chaos in the courts and Gunfight at the OK Corral. So ... "why can't we all just get along?" and admit the US government can exercise property rights like any other owner?

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